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Coronavirus sinks its teeth into the big economies

COVID-19 is sweeping nations around the world, blighting the health and wellbeing of millions of citizens. Recycling International has been assessing the impact of the virus on the world’s leading economies.

The uptick in global gross domestic product (GDP) could be as low as 1% this year, according to the Institute for International Finance, pointing out that the world economy grew 2.9% last year.

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China: China’s economy is predicted to shrink 9% by the end of Q1 2020, according to Goldman Sachs analysts who had previously predicted a 2.5% increase during this period. Factory production is at the lowest level for 30 years and car sales plummeted 92% in the first two weeks of February. The economy is expected to recover somewhat, not until Q3 at best with Q4 much more likely.

Due to the muted growth prospects, China is likely to witness only 3% growth this year, which would be 2.5% less than anticipated. Annual GDP growth is slated to be the weakest since 1976.

Japan: The economy of Japan was already ‘teetering on the brink of recession’ before the virus appeared on the stage, the Japan Times concludes. This is partly due to an increase in consumption tax to 10% in October, up from 8%. New data reveals GDP shrank faster in the October-December quarter than first thought: down 7.1% instead of 6.3%. Businesses are now advocating a reversal of the tax increase, hoping it may boost consumption.

Meanwhile, preparations are still underway for Tokyo to host the Olympic Games which are scheduled to run from 24 July – 9 August. Faced with a global battle with Covid-19, the Games may have to be postponed to a safer date. Government sources say Japan has invested an estimated EUR 11.7 billion in the Olympics but others argue the budget is at least twice that figure. Cancelling the Games would reduce Japan’s GDP by almost 1.5%, predicts SMBC Nikko chief economist Junichi Makino.

‘We need measures on the same scale as the 2008 financial crisis. They should be bold and not limited by what’s been done before,’ says Yasutoshi Nishimura, Japan’s economic revitalisation minister.

USA: The US economy’s growth is widely expected to stall in Q1 and decrease around 5% in Q2. But the economy should bounce back by 3% in Q3, followed by 4% growth in the last few months of the year. Total GDP growth for 2020 is expected to be 0.4%, compared to the previously reported estimate of 1.2%.

Meanwhile, Mark Zandi, chief economist at Moody’s Analytics, says around 27 million people are ‘at high risk’ due to the virus. The company’s weekly survey of 350 businesses found that in December over 40% of businesses were hiring. As of last Friday, the number is down to 12%. The Trump administration is proposing a rescue plan of an estimated US$ 850 billion (EUR 773.6 billion).

UK: The UK will also feel the pain of the pandemic soon, reports Paul Dales, chief economist of research company Capital Economics. ‘With the peak of the virus yet to come, it is clear we are in the early days of a big recession. As such, our previous forecast that GDP would fall by 2.5% quarter-on-quarter in Q2 is no longer fit for purpose,’ he comments.

Dales predicts the decrease in GDP could be 10%, or even 20% in a worst-case scenario. He points out this would be worse than the 2008 crisis, which lasted for five quarters during which GDP fell 6%. He says it may be well into 2021 before the economy reaches its current size again.

Prime Minister Boris Johnson said in a speech on Tuesday that the UK would act like ‘any wartime government’ by doing ‘whatever it takes’ to support the economy. Chancellor Rishi Sunak announced at the same press conference that he had set aside an ‘unprecedented’ £330 billion of government-guaranteed loans for struggling businesses.

France: ‘No French company, whatever its size, will be exposed to the risk of collapse,’ declared President Emmanuel Macron in a televised national address on Monday. This means that France will spend EUR 45 billion to help small businesses and employees struggling with the coronavirus outbreak. Finance Minister Bruno Le Maire predicts that the ‘drastic measures’ taken by Macron could limit the economic contraction in France to 1% this year.

Italy: With a death toll exceeding 2 155, it’s clear the virus has so far hit Italy the hardest of all European nations. Tourism and transport have nosedived 90% in recent weeks. Lorenzo Codogno, the former Treasury chief economist, believes Italy’s GDP will fall 1.2% in Q1 and 3% Q2. Due to the lockdown, Italy’s GDP is now running approximately 15% below normal levels.

In order to restore order and protect its ‘fragile’ economy, Italy approved a rescue package worth EUR 28 billion on Monday. ‘This is a weighty economic package. We never thought we could face this flood with mops and buckets,’ declared Prime Minister Giuseppe Conte at a press conference.  

Germany: Major German companies including Volkswagen are preparing to shut their factories. Airline Lufthansa has scrapped 90% of long-haul flights. It seems unlikely the economy will start to stabilise before Q3.

This week, finance minister Olaf Scholz assured citizens that Germany was mobilising at least EUR 500 billion in loan guarantees and pledged to provide ‘unlimited liquidity’ to companies affected by the pandemic.

However, the mood among German investors slumped this month to levels last seen at the beginning of the world financial crisis in 2008, Reuters reports. ‘Economic sentiment among investors collapsed to -49.5 from 8.7 in February,’ it cites a new survey by the Leibniz Centre for European Economic Research (ZEW). This is the biggest drop since it started its monthly survey in 1991. Economists had expected a fall of 26.5 at most.

The coronavirus outbreak is likely to have a big impact on Europe’s largest economy, says ZEW president Achim Wambach who adds. ‘The economy is on red alert. For 2020 as a whole, most investors expect a decline in Germany’s real GDP growth of about 1%.’

India: India’s economic growth could take a hit of 0.3%-0.5% this financial year because of the Covid-19 disruptions, early government estimates suggest. If so, the economy is forecast to grow just over 5% in total; the lowest result in 11 years. But the Economic Times points out that independent economists foresee a deeper cut of 1% or so. Growth figures for next year are currently lingering around the 5.5% mark.

EU: Margrethe Vestager, a top official at the European Commission, issued a statement advocating a relaxation of antitrust rules to allow struggling companies to receive state grants up to EUR 500 000, plus loans with subsidised interest rates.

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